Incentive Compensation, Valuation, and Capital Market Access

In this paper we consider linear sharing rules for incentive compensation, when principal and agent are potentially restricted from short sales. We derive subjective valuation lines for performance shares, based on graphical analyses, and present results with respect to implementing effort and investment incentives. When the agent is restricted from short sales, he may reject an investment with positive market value, and higher performance shares may not induce proper incentives. Relative Performance Evaluation will improve incentives and risk sharing, but there will generally be no clear definition of a suitable benchmark